Euro Zone Decline Eases, Recession still Looks Certain: PMI

(Reuters) - The decline in the euro zone's private sector eased a little this month, but a recession still looks inevitable with the region's periphery struggling badly, a key business survey showed on Thursday.

Markit's Eurozone Composite Purchasing Managers' Index (PMI), which measures the activity of thousands of euro zone companies, rose for a second month in December to 47.9 from 47.0, confounding expectations for a fall to 46.5.

But the preliminary reading lingered well below the 50 mark that divides growth and contraction for a fourth month.

Survey compiler Markit said France and Germany were responsible for the improved headline figure, while debt-laden peripheral countries remained firmly in contraction territory.

It's an encouraging sign that (the index) didn't fall any further. Quite what will happen henceforth remains highly uncertain, said Chris Williamson, chief economist at Markit.

But overall the data point to a deep contraction.

The euro zone suffered its worst quarter for two and a half years in the final three months of 2011, with the PMI data suggesting that the region's economy is likely to have contracted by 0.6 percent.

That forecast is worse than the median consensus of 0.3 percent in a Reuters poll of economists on Wednesday.

Williamson pointed to steep falls in incoming new orders and very low levels of confidence about the year ahead in the services industry as reasons to expect more decline.

Whether the rates of decline continue to moderate or accelerate is largely in the hands of the political leaders, and financial markets in their reaction to any changes in the sovereign debt situation, said Williamson.

EU leaders last Friday took a historic step towards fiscal union at a summit last week, but economists have warned this will do little to repair a debt crisis that is choking off market funding for Spain and Italy.

Williamson warned that further weakness in these peripheral economies could yet knock the stronger core economies of France and Germany off track.

Taking a step back, he said the surveys could be viewed as a sign that the euro zone economy is beginning to restructure itself although improvements in output so far haven't been forthcoming.

Perhaps the notable bright spot in the composite PMI was the jobs index, which rose to 50.9 from 50.1 in November. Williamson said this was encouraging, but he noted that this also was largely due to Franco-German strength, with dole queues lengthening in the periphery.

The services PMI, which accounts for the bulk of the euro zone economy, rose to 48.3 in December from 47.5. But the survey's business expectations index stayed at 53.5, low by historical standards.

The manufacturing index also rose modestly, to 46.9 from 46.4, but still its fifth month below the breakeven 50 point.

Its output component, which feeds directly into the composite PMI, showed a bigger rise -- to 47.1 from 45.7.

Factory order books continued to shrink sharply, however, albeit at a slightly reduced pace, with that sub-index rising to 43.3 from 42.4 in November, which was its lowest since May 2009.

Overall, Williamson cautioned against reading the improvement in the headline figures as a meaningful step towards growth.

It's really too early to say whether this represents a proper turning point and that the situation won't deteriorate in the coming months, he said.